Cleene Division of Soaphen Corporation produces soap, 20% of which are sold to Bubbly Division of Soaphen Corporation. The remainder is sold to outside customers. Soaphen treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost at transfer price. Cleene Division’s estimated sales and standard cost data for the year ending December 31, 2000, based on capacity of 100,000 units are as follows: BUBBLY OUTSIDERS Sales 900,000 8,000,000 Variable Costs (900,000) (3,600,000) Fixed costs (300,000) (1,200,000) Gross Margin (300,000) (320,000) Unit Sales 20,000 80,000 Cleene has an opportunity to sell the 20,000 units shown above to an outside customer at a price of P75 per unit. Bubbly can purchase its requirements from an outside supplier at a price of P85 per unit. REQUIRED: Assuming that Cleene Division desires to maximize its gross margin, should Cleene take on the new customer and drop its sales to Bubbly in the current year? Why? Assume, instead, that Soaphen Corporation permits division managers to negotiate the transfer price for the year. The managers agreed on a tentative transfer price of P75 per unit, to be reduced based on an equal sharing of the additional gross margin to Cleene resulting from the sale to Bubbly of 20,000 units at P75 per unit. What would be the actual transfer price for the year? Assume now that Cleene Division has an opportunity to sell the 20,000 units that Bubbly Division would buy to the same customers that are buying the other 80,000 units produced by Cleene. Cleene Division could sell all 100,000 units to outside customers at a price of P100. What actions by each division manager are in the best interest of Soaphen Corporation?

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter11: Performance Evaluation And Decentralization

Section: Chapter Questions

Problem 16BEA

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Cleene Division of Soaphen Corporation produces soap, 20% of which are sold to Bubbly Division of Soaphen Corporation. The remainder is sold to outside customers. Soaphen treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost at transfer price. Cleene Division’s estimated sales and standard cost data for the year ending December 31, 2000, based on capacity of 100,000 units are as follows:

	BUBBLY	OUTSIDERS
Sales	900,000	8,000,000
Variable Costs	(900,000)	(3,600,000)
Fixed costs	(300,000)	(1,200,000)
Gross Margin	(300,000)	(320,000)
Unit Sales	20,000	80,000

Cleene has an opportunity to sell the 20,000 units shown above to an outside customer at a price of P75 per unit. Bubbly can purchase its requirements from an outside supplier at a price of P85 per unit.

REQUIRED:

Assuming that Cleene Division desires to maximize its gross margin, should Cleene take on the new customer and drop its sales to Bubbly in the current year? Why?
Assume, instead, that Soaphen Corporation permits division managers to negotiate the transfer price for the year. The managers agreed on a tentative transfer price of P75 per unit, to be reduced based on an equal sharing of the additional gross margin to Cleene resulting from the sale to Bubbly of 20,000 units at P75 per unit. What would be the actual transfer price for the year?
Assume now that Cleene Division has an opportunity to sell the 20,000 units that Bubbly Division would buy to the same customers that are buying the other 80,000 units produced by Cleene. Cleene Division could sell all 100,000 units to outside customers at a price of P100. What actions by each division manager are in the best interest of Soaphen Corporation?

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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